sobha developers - karvy

8/13/2019 Sobha Developers - Karvy

1/13

Infrastructure February03,2014

SobhaDevelopers

Bloomberg:SOBHAINReuters:SOBH.BO BUY

InstitutionalEquities

IndiaResearch

RESULTREVIEW

Recommendation

CMP: Rs277

TargetPrice: Rs460

PreviousTargetPrice: Rs460

Upside(%) 66%

StockInformationMarketCap.(Rsbn/US$mn) 26/416

52weekHigh/Low(Rs) 498/213

3mADV(Rsmn/US$mn) 51/0.8

Beta 0.9

Sensex/Nifty 20,514/6,090

Shareoutstanding(mn) 98

StockPerformance(%)1M 3M 12M YTD

Absolute (14.7) (14.9) (38) (14.7)

Rel.toSensex (12) (12.2) (39.9) (12)

Performance

Source:Bloomberg

AnalystsContactParikshitKandpal

02261844311

[email protected]

VarunChakri Associate

02261844326

[email protected]

200250300350400450500

15,500

17,500

19,500

21,500

23,500

Jan13

Feb

13

Apr13

May13

Jun13

Aug13

Sep13

Oct13

Dec13

Jan14

Sensex (LHS) SOBHA

NomajorsurprisesSobhaDevelopersLtd. (SDL)delivered inline3QFY14performance,with

higherthanexpectedrevenueandinlineEBIDTAandnetprofits.Theonly

disappointment was on presales guidance which was lowered largely

attributed to delay in receiving approvals. Despite this we maintain our

BUY ratingwithNAVbased targetpriceofRs460/shareowing to (i)new

upcoming launches of 11mn sqft (iii) healthy balance sheet & (iv) SDLs

strongcompetitivepositioning.

3QFY14quarterlyperformancelargelyinline

During

3QFY14

Sobha

Developers

(SDL),

Sales,

EBIDTA

and

net

profit

grew

26.6%, 8.4%, 10.5% respectively YoY. Whilst Revenue was higher than our

estimateby5.9%,EBIDTA&NetProfitwasaheadofourexpectationby0.3%

and (1.2%)respectively.Revenue fromcontractualprojectsdeclined to26%

(from 32% during 2QFY14, ~15% EBIDTA margins) inline with last 8Q

average26%revenueshare.Thisresulted inEBIDTAmarginsexpansionof

88bps QoQ. Real estate development contributed 74% to revenue with

~31.8%EBIDTAmarginswhichwas lowervs2QFY14marginsof34%.SDL

reported Net profit of Rs581mn which was inline with our estimate of

Rs588mnandgrowthof10.8%YoY.

Strongbalancesheetrecoveryaugurswellforgrowth

SDLhas

de

leveraged

its

balance

sheet

from

1.95x

net

debt/equity

end

FY08

to0.6xendFY13, thanks toaQIP inJune2009andstrongoperationalcash

flows. Weexpect furtherreduction in thenet debt/equityratio to0.5x over

FY1415E as we forecast stable IT/ITESdriven housing demand. As of

3QFY14 end net debt/equity stands at 0.57x, largely unchanged from the

2QFY14balancesheet.

MaintainBUY:TargetpriceRs460/shareWe maintain our BUY stance with SOTPbased target price of Rs460/share.

WevaluetherealestatebusinessatRs431/shareusingaNAVmodelandthe

contracting and manufacturingbusiness (C&M) at Rs29/share. Webelieve

that theneartermcatalystsare: (i)strong launchpipelineand (ii) focuson

furtherbalance

sheet

de

leveraging

(iii)

healthy

cash

flows.

Key

risks

(i)

An

oversupply may lead to a 810% realty price; (ii) liquidity tightening could

increaseborrowingcostsby150200bpsloweringourNAVby6%.

KeyFinancial Consolidated

Y/EMar(Rsmn) FY11 FY12 FY13 FY14E FY15E

Operatingincome 13,945 14,079 18,645 20,705 25,260

EBITDA 3,600 4,666 5,483 5,879 7,549

EBITDA(%) 25.8 33.1 29.4 28.4 29.9

Netprofit 1,861 2,136 2,214 2,382 3,561

EPS(Rs) 18.8 21.4 22.1 24.3 36.3

RoE(%) 10.4 10.9 10.5 10.7 14.6

P/E(x) 14.7 12.9 12.5 11.4 7.6

P/BV(x) 1.5 1.4 1.3 1.2 1.1

Source:Company,KarvyInstitutionalResearch


2/13

2

February03,2014

SobhaDeveloper

3QFY14performancelargelyinline

During3QFY14SobhaDevelopers (SDL),Sales,EBIDTAandnetprofitgrew26.6%, 8.4%, 10.5% respectively YoY. Whilst Revenue was higher than our

estimateby5.9%,EBIDTA&NetProfitwasaheadofourexpectationby0.3%

and(1.2%)respectively.

Revenuefromcontractualprojectsdeclinedto26%(inlinewithlast8Qaverage26% revenue share, ~15% EBIDTA margins contribution) from 32% during

2QFY14. This resulted in EBIDTA margins expansion of 88bps QoQ. Real

estatedevelopmentcontributed74%torevenuewith~31.8%EBIDTAmargins

which was lower vs 2QFY14 margins of 34%.Sharp increase in construction

expensesandsubcontractorcharges97.3%&82.6%YoYrespectivelyresulted

inlimitedbenefitsonaccountofincreasingrealizations.

SDL reported Net profit of Rs581mn which was inline with our estimate ofRs588mnandgrowthof10.8%YoY.

SDL reported strong collections of Rs6.5bn whilstbeing neutral on net cashflow position at (Rs457mn). We expect pick up in collections with new

launchesof~3mnsqfthittingin4QFY14E(~2mnsqftinBangalore&~1mnsqft

in rest of India) and~11mn sqft over next1215M. SDL incurred Rs280mn of

CAPEXonallcommercialassetsputtogetherduring9MFY14.

Whilsttherevenuewasaheadofestimate,EBIDTAandPATwereinlinewithour

expectations.TherewasanincreaseindebtorsbyRs361mnQoQ.Netdebt/equity

remained at 0.57x and Net debt levels increasedby Rs349mn QoQ. During the

quarterSDLreported 0.74mnsqft of newsales translating intoanorderbook of

Rs5,023mn which was dismal owing to limited new launches on delayed

approvals. SDL has revised its annual guidance of 4.2mn sqft in presales and

Rs26bn in sales value downward whilst highlighting it willbebetter than FY13.WeexpectSDLtonowbookpresaleofRs24.5bnandsalesvolumeof~3.8mnsqft.

Exhibit1:3QFY14resultsperformanceRsmn 3QFY13 2QFY14 3QFY14 YoY% QoQ%

Netsales 4,298 5,408 5,443 26.6 0.6

Expenses 2,924 3,975 3,953 35.2 (0.6)

(Increase)/Decinstockintrade (1,524) (919) (1,844)

LandPurchaseCost 1,316 459 1,043 (20.7) 127.2

ConstructionExps 221 420 436 97.3 3.8

RawMaterialExps 1,261 1,623 1,725 36.8 6.3

Subcontractor&Labourcharges 788 1,336 1,439 82.6 7.7

EmployeeExpenses 397 408 503 26.7 23.3

Otherexpenses 465 648 651 40.0 0.5

EBITDA 1,374 1,433 1,490 8.4 4.0

EBITDAmargin(%) 32.0 26.5 27.4 (459) 88Depreciation 153 172 172 12.4

EBIT 1,221 1,261 1,318 7.9 4.5

Interestexpense 439 434 446 1.6 2.8

Otherincome 15 37 12 (20.0) (67.6)

Profitbeforetax 797 864 884 10.9 2.3

Tax total 271 298 301 11.1 1.0

Netprofit 526 566 583 10.8 3.0Minority

intt/associates

2Netprofitafterpriorperioditems 526 566 581 10.5 2.7



3/13

3

February03,2014

SobhaDeveloper

Salesvolumesdismal Volumesdegrew26.2%QoQand18%YoY

Despiteaseasonallystrongquarter(festive)SDLhasreportedvolumedegrowth

of 26.2% QoQ and 18% YoY. The new launches viz. Elan, Coimbatore (JD with

Lakshmi Machine Works) with saleable area of 0.32mn sqft and Sobha Estate,

Mysore

(plotted

development)

with

saleable

area

of

0.13mn

sqft

didnt

add

up

muchtothepresalesnumbers.Thekeyhighlightsof3QFY14are

Bangalore witnessed a degrowth of 14.8% YoY, absence of new launches

impactedpresales

NCRsawasharpdecelerationofnewsalesdown77.2%YoY.Thisispartially

attributable to unaffordability in NCR market and partially on account of

projectconfiguration.

Almost all regions contributed negatively to sales volume YoY, except for

PuneandMysore.

Averagerealization/sqft

grew

14.8%

YoY,

which

partially

allayed

shortfall

in

sales

volume.During9MFY14,SDLrecordednewsalesof2.66mnsqftwithsalesvalue

of Rs17.37bn a growth of (0.8%) and 12.8% YoY. Company highlighted that a

lackluster 3QFY14 makes it cautious to achieve full year presales value and

volume guidance of Rs26bn and 4.2mn sqft respectively. SDL has ~11mn sqft of

new launches planned for CY14E (SDLs share ~8.7mn sqft, ~3mn sqft planned

during4QFY14E~2mnsqft inBangalore&1mnsqft inGurgaon,Kozhikode&

Coimbatore), lending visibility to new sales. We believe that main reason for

guidancedowngrade is largelyattributable todelayedapprovalsandhencemay

notbeamajorcauseofconcern.SDLhighlightedthattheystillmaintaintargetof

~1mn+ in presales as quarterly runrate contingent to timely approvals and

indicated

thatJan

14

has

been

the

best

month

with

Gurgaon

sales

picking

up

besidesotherGeographiesalsocontributing.Thisbuildsmomentumfor4QFY14E

beingastrongpresalesquarter forSDLwithsalesexceeding the~1mn+sqft.We

expect SDL to now book FY14E presale of Rs24.5bn and sales volume of

~3.8mnsqft.

Exhibit2:SalesvolumeandrealizationSalesData 3QFY13 2QFY14 3QFY14 YoY% QoQ% 9MFY14 9MFY13 YoY%

Volumes(sqft):

Bengaluru 591,216 674,622 503,708 14.8 25.3 1,781,385 1,701,734 4.7

Thrissur 88,407 103,270 49,064 44.5 52.5 301,528 250,809 20.2

Chennai

67,350 86,869 53,523

20.5

38.4 240,355 181,756 32.2Coimbatore 19,574 15,871 17,124 12.5 7.9 32,995 56,210

Pune 23,124 12,716 24,433 5.7 92.1 60,061 92,384

NCR 103,098 30,892 23,522 77.2 23.9 90,669 376,419

Kozhikode 56,661 42,293 98,954

Mysore 9,881 22,128 26,538 168.6 19.9 57,966 25,065

Total 902,650 1,003,029 740,205 18 26.2 2,663,913 2,684,377 0.8

5,910 6,304 6,786 14.8 7.6 6,522 5,738AveragePrice

realisation(Rs/sf)

SalesValue(Rsmn) 5,335 6,323 5,023 5.8 20.6 17,375 15,403 12.8



4/13

4

February03,2014

SobhaDeveloper

Netdebt/equityremainsunchangedat0.57x

SDLnetD/Ehasremainedunchangedat0.57xandwhilsttheabsolutenumberhas

grown. We expect leverage should remain stable in the 050.6x band. During

9MFY14, SDL generated positive CFO of Rs4,202mn which was offsetby cash

outflowsof

Rs2,022mn

towards

financing

and

Rs3,012mn

towards

investing.

This

resultedinnetcashoutflowofRs832mnandresultantincreaseinthedebtlevels.

Asof9MFY14NetdebtstoodatRs13.03bnwhich isan increase indebt levelsof

Rs820mnasof4QFY13end.

Exhibit3:DebtandnetD/Emovement

Source:Company

CapexmaybeslowduringFY14EandFY15E

During 3QFY14/9MFY14, SDL incurred a commercial asset Capex of

Rs82mn/Rs280mn largely towards the APMC project and Shopping Mall at St

MarksRoad. SDL is yetawaiting DetailedProject Reporton the APMC project

whichmaytake9Mtocomeandpostthat1yrmaygotowardspiling/foundations

work.Theconstructionwillstartfrom1QFY16EhencetheCAPEXintensitywillbe

lowandwillgetdilutedbyhighercashflowsovertheFY1618Eperiod.

0.52

0.54

0.56

0.58

0.6

0.62

0.64

8

9

10

11

12

13

14

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

Debt NetD/E(x)


5/13

5

February03,2014

SobhaDeveloper

InvestmentRationale

Bestplacedamongstpeers

Ashighlighted

in

the

thematic

section

of

the

note,

SDL

is

best

placed

amongst

the

Southernpeersonaccountofitssuperiorlandbankqualityandquantity,accessto

finance, healthy balance sheet & successful foray outside home location in

Gurgaon. The macro factors are well supportedby conducive Southern markets

whichremaindemandhealthyandaffordable.Wehighlightourfindinginexhibit

4toarriveatoverallcompetitivepositioning.

Exhibit4:OverallcompetitivepositioningofrealestatedevelopersMacro

Competitive

30%weight

Business

Competitive

25%weight

Landbank

&Pricing

20%weight

Balance

Sheet

positioning

25%

weight

Overall Comments

Sobha

Sobha is the best positioned on strong balance sheet

positioning,highbrand recalland superior landbank.We

rateitatopquartile

Prestige

PrestigeEstatesscoreswellonexecutionandbrandrecall.It

scoreswellontheJDAstrategyoflandacquisition.AMid

quartileinmostoftheparameters

Puravankara

Amidquartileonallparameters.Expecteddeleveragingof

balance sheet through OFS route shall further strengthen

competitivepositioning

Mantri Amidquartilewithstrongbrandrecallinsouthernmarkets

Brigade Brigadeseemsmiddling

Source:KarvyInstitutionalResearch;Note: Strong; RelativelyStrong; Average; RelativelyWeak WeakOn overall competitive positioning, we find that the top real estate playersincludeSobha,Prestige&PuravankarainSouthernmarkets.SDLwiththerightmix of branding, execution capability, balance sheet strength and underlyingbusinessfundamentals remainsbestpoisedamongst thepeers.Notwithstandingtheir

scores

differ

on

these

factors

we

see

limited

differentiation

on

an

overall

basis.


6/13


7/13

7

February03,2014

SobhaDeveloper

ValuationNAVtargetofRs460/share

SOTPValuation

We

maintain

our

BUY

rating

on

SDL

with

a

SOTPbased

target

price

of

Rs460/share.WevaluetherealestatebusinessatRs431/shareandthecontracting

andmanufacturingbusiness(C&M)atRs29/share.Weusethenetprofitforecasts

ofthecontractingandmanufacturingsegmentandvaluethesebusinessesat6x&

8xFY15EEPSrespectively,inlinewiththeconstructionsectorvaluationmultiples.

Exhibit7:SumofthepartsRsmn Rs/share Comments

ResidentialNAV 42,293 431Valuationat0.7xFY14ENAV

(seeexhibit8)

Cashcontractingbusiness 1,834 19 At6xFY15EP/E

Manufacturingbusiness 986 10 At8xFY15EP/E

Total 45,113 460

Source:KarvyInstitutionalResearchRealestatedevelopmentNAVcalculationmethodology

WehavedividedSDLsentirelandbankintoresidentialprojects(basedontheinformationgivenbythecompany)

Wehavearrivedatthesaleprice/sq ft.and theanticipatedsalesvolumesforeachprojectbasedonourdiscussionswithindustryexperts

We have deducted the cost of construction based on our assumed costestimateswhichhavebeenarrivedatafterdiscussionswithindustryexperts

We have further deducted marketing and other costs which have beenassumedat5%ofthesalesrevenue

Wehavethendeductedincometaxbasedonthetaxapplicablefortheproject Theresultantcashinflowsattheprojectlevelhavebeendiscountedbasedon

WACCof17%(costofequity21.3%basedonbetaof1.9,costofdebt15%&

debt/equityratioof0.6x).AlltheprojectlevelNAVshavethenbeensummed

uptoarriveattheNAVofthecompany

From the NAV, we have deducted the net debt as of FY14E to arrive at thefinalvaluationofthecompany.

NAVcalculationBasedon the methodology above wearrive at SDLs grossNAVof Rs73,029mn.

Wefurther

make

adjustments

for

the

value

of

net

debt

as

at

end

March

2014

and

incorporateNAVdiscountof30%toarriveatSDLsNAV/shareofRs431.

Exhibit8:NAVcalculationRsmn Comments

GrossNAV 73,029NAVbasedonthemethodologyabove

(seetableontheleftfordetails)

Lessnetdebt 12,610 NetdebtasonMarch2014E

NAV 60,419

Sharesoutstanding(mn) 98 AsofDec2013

RNAV/share(Rs) 616

DiscounttoNAV(%) 30

NAV/share(Rs) 431

Source:KarvyInstitutionalResearch

NAVbylocation

LocationGrossNAV

(Rs mn) %

Bangalore 41,130 56.3

Chennai

10,846

14.9

Kochi 6,293 8.6

Hosur 4,779 6.5

Pune 2,933 4.0

Coimbatore 1,434 2.0

Mysore 386 0.5

Thrissur 1,620 2.2

Gurgaon 3,112 4.3

Calicut 498 0.7

Total 73,029 100



8/13

8

February03,2014

SobhaDeveloper

Keyvaluationassumptions

Inexhibit9wehighlightoursalesandcostinflationforecasts.Weexpectproperty

price

appreciation

in

line

with

WPI

inflation

i.e.

5%.

We

forecast

other

costs

includingmarketing,SGAandemployeescostsat5%ofsales.

Exhibit9:BasecaseassumptionsDiscountrate 17%

Annualrateofinflationsalesprice 5%

Annualrateofinflationcostofconstruction 5%

Othercostsmarketing,SGA,employeecost(as%ofsales) 5%

Taxrate(%) 33%


In

the

exhibit

10

we

highlight

our

sale

price

and

construction

cost

forecasts.

Our

pricing assumptions are moderate and at a 1020% discount to the current

prevailingprices.

Exhibit10:BasepropertypriceandconstructioncostassumptionsLocation Saleablearea Prices Cost

mnsqft Rs/sqft Rs/sqft

Bangalore 85.3 4,450 2,400

Mysore 2.6 2,150 1,500

Pune 5.3 4,500 2,200

Chennai 38.1 4,250 2,200

Kochi

48.4 3,450 1,900Hosur 34.8 2,200 1,300

Thrissur 5.6 3,500 2,200

Coimbatore 6.0 3,500 2,200

Gurgaon 4.3 7,450 3,425

Calicut 1.0 3,450 1,800

Total 231



9/13

9

February03,2014

SobhaDeveloper

Keycatalysts

Successofnewlaunches

SDLhas

unsold

inventory

of

7.3mn

sqft

as

of

3QFY14

and

has

planned

11mn

sq

ft

ofnew launchesovernext1215Mwith45%of the launchesat locationsoutside

Bangalore (viz. Chennai, Cochin and Calicut). In addition to the launches above

SDLplanstodevelop270acresofexistinglandbankadmeasuring21mnsqftover

thenext1to3years.WhilstweforecasttheFY14Esalesrunratefromtheexisting

projectstobemaintainedat~1.8mnsqft,webuild in~2.0mnsqftadditionfrom

proposedlaunchesinnewlocations.

Changeinlaunchmixmayresultinmarginexpansion

SDLs project launch prices in new markets (viz. Chennai, Cochin, NCR and

Calicut) will result in better realization as property prices have seen sharp

recoveryin

these

markets

over

FY12

13.

Besides

Bengaluru

continues

to

do

well

withpricessurpassingtheirFY08peak.

KeyriskstoourBUYstance

OversupplyintheSouthernmarketmayresultinpropertyprice

correction

High unsold real estate inventory and aggressive launch plans (4x of what they

havelaunchedoverpast23years)oftheSouthernrealestatedevelopersmaylead

toanoversupplysituationintheSouthernrealestatemarket.Whilstaffordability

in

South

is

still

reasonable

an

oversupply

situation

can

lead

to

a

0

5%

price

correction. This drop in realization couldbe margin dilutive, more so with high

input costs. Hence this may result in sharp financial and stock price

underperformance. For every 1% correction inbase residential prices our NAV

estimateforSDLwillbenegativelyimpactedby3%.

Liquiditytighteningmayresultincashflowpressures

The tightened liquidity scenario has led to developers evaluating current

repayment needs versus new launches. Hence cash flows from existing projects

maybeutilizedforretiringdebtratherthanreinvestmentinnewprojectlaunches.

The sustained liquidity tightening may impact new launches and thereby the

momentum

in

cash

flows.

Whilst

this

is

a

generic

risk

for

the

sector,

SDL

is

relativelyneutrallyimpactedasbalancesheetremainsstrong.


10/13


11/13


12/13

InstitutionalEquitiesTeam

Rangachari

Muralikrishnan

HeadInstitutionalEquities /

Research

/Strategy

+91

22

61844301

[email protected]

K.AnantRao Head SalesTrading&Derivatives +912261844303 [email protected]

INSTITUTIONALRESEARCH

Analysts Industry/Sector DeskPhone EmailID

AmeyChalke PharmaceuticalsAssociate +912261844325 [email protected]

AnkurLakhotia DerivativesandQuantAssociate +912261844327 [email protected]

HatimBroachwala,CFA Banking +912261844329 [email protected],CFA Economist +912261844320 [email protected]

ManojKumarManish DerivativesandQuantAnalyst +912261844343 [email protected]

Maruti

Kadam

Research

Associate

+91

22

61844326

[email protected]

MitulShah Automobiles +912261844312 [email protected]

ParikshitKandpal Infra/RealEstate/Consumer/Strategy +912261844311 [email protected]

RahulSharma Pharmaceuticals +912261844310 [email protected]

RahulSingh Textiles +914044857911 [email protected]

RajeshKumarRavi Cement,Logistics&Paints +912261844313 [email protected]

RupeshSankhe Power/CapitalGoods +912261844315 [email protected]

VarunChakri ResearchAssociate +912261844326 [email protected]

INSTITUTIONALSALES

CelineDsouza Sales +912261844341 [email protected]

EdelbertDcosta

Sales

+91

22

61844344

[email protected]

INSTITUTIONALSALESTRADING&DEALING

BhaveshGandhi SalesTrader +912261844368/69 [email protected]

GurdarshanSinghKharbanda SalesTrader +912261844368/69 [email protected] SalesTrader +912261844370/71 [email protected]

AsimKumarMohapatra Editor +912261844318 [email protected]

VijayalaxmiL.Moolya Production +912261844328 [email protected]


13/13

Forfurtherenquiriespleasecontact:[email protected]

Tel:+912261844300

DisclosuresAppendix

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The following analyst(s),who is (are)primarily responsible for this report, certify (ies) that the views expressedherein

accurately reflecthis (their)personalview(s)about the subject security (ies) and issuer(s)and thatnopartofhis (their)

compensationwas,isorwillbedirectlyor indirectlyrelatedtothespecificrecommendation(s)orviewscontained inthis

researchreport.

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The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information

containedherein isbasedonouranalysisanduponsourcesthatweconsiderreliable.We,however,donotvouchforthe

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the

completeness

thereof.

This

material

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and

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for

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loss

incurredbasedupon it.The investmentsdiscussedor recommended in this reportmaynotbe suitable forall investors.

Investorsmustmaketheirowninvestmentdecisionsbasedontheirspecificinvestmentobjectivesandfinancialpositionand

usingsuchindependentadvice,astheybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthis

report,investorsmaypleasenotethatneitherKarvynorKarvyStockBrokingnoranypersonconnectedwithanyassociate

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